Regulations (https://www.investopedia.com/terms/r/regsho.asp) exist to prevent more shares being shorted than exist. However, those lending out shares to be used in a short can demand them back. Also, banks might demand you put up more capital as a stock you shorted increased in value. But I wanted to clarify that there are regulations such that you can't short a stock out of thin air, the stock you're shorting must be "located". Making shorting completely illegal would likely lead to irrationally high values in the market, creating more bubbles like this one.

> Make shorting illegal.

Short sellers profit from exposing fraud (like those that researched Enron and Wirecard). Making the only market participants with financial incentive to put downward pressure on stock prices illegal seems like a bad idea.

They also profit from creating the perception of fraud, filing spurious lawsuits and marketing against companies they are shorting.

Shorting is illegal in Australia, Germany, Italy, Spain, Portugal and a few other countries with large financial markets. The US has the most "open" policies on shorting in the world. Short selling was an extremely large contributor to the 1929 stock market crash.

Short selling is not illegal in Germany. I also suspect you are wrong about some of the other countries as well. But regardless, you would be hard pressed to find anyone in the industry who thinks shorting is bad. The overwhelming consensus is that shorting is very good to allow

How did they notice that the hedge fund had overextended their short position by so much? Is such information part of some required reporting?

Don't know exactly how, but the data are availble. One source is https://s3partners.com/, not to be confused with Amazon S3